Michigan Business Tax

Growing up I was taught by my father that there were only two guarantees in this life: death and taxes. One is extremely simple and the other is exceptionally complicated. There is only one thing that complicates taxes more and that is the taxation of business entities. And in past year the concepts that surround business taxes in Michigan have become more complicated.
Many people were relieved to hear that the Michigan Single Business Tax (SBT) would no longer be in effect. After making their first filing under the new Michigan Business Tax (MBT) and preparing to have to make another soon, many have the opinion that this new law is more confusing than the old.

OVERVIEW

There are four parts that make up the MBT and there is a fifth for small businesses. Depending on the whether the tax payer is a financial institution, insurance company, small business or none of these will determine which of the five parts the business is responsible for.
The general rule is that a business will be responsible for the business income tax portion (BIT), the modified gross receipts tax (MGRT) and a surcharge. If the business qualifies as a small business, it will be limited to a 1.8 percent tax and no surcharge. Financial institutions and insurance companies are exempt from the BIT and MGRT but they have their own specific industry taxes they must pay.

SPECIFIC ISSUES

Under the SBT a unitary combined filing could only be done by permission which was difficult to receive. Under the new MBT, a combined return is required for any group of taxpayers if (1) the taxpayers are owned more than 50 percent by one person and (2) there is a flow of value between or among the taxpayers.
There is also a prominent difference between how an S Corporation and LLCs are taxed. Usually these two entities are seen as very similar because they are corporations that are taxed as flow-through entities. The difference now comes from the fact that LLCs have to pay a federal self-employment tax and S Corps don’t. Under the MBT, LLCs are permitted to deduct this federal tax payment from their Michigan return.
There is also a new test as to how to determine if a there is a significant nexus between an out of state business and Michigan. If there is a significant nexus the business will have to pay taxes in Michigan. A non-Michigan business will have nexus and be subject to the MBT if it either has (1) a physical presence for more than one day during the tax year or (2) gross receipts apportioned to Michigan of at least $350,000 and actively solicits sales in Michigan.

This is an obvious simplification of all that goes into the MBT. There are other issues surrounding it and more in depth factors to the ones discussed here. A business that operates in Michigan should see these issues and at least recognize that they might be subject to them. If there is a possibility these businesses should contact an attorney to discuss their liability and options.